Public employee pension plans in Santa Barbara County face potentially serious liquidity and solvency risks that may require the county and its cities to adopt new policies to keep them under control, according to a recent grand jury report.
But unexpected financial shocks could lead to more drastic measures like reducing salaries and benefits and raising employer and employee contributions, the report said.
The report found the three largest plans, which include Lompoc’s six plans, Santa Maria’s seven and Santa Barbara’s four, hold 96 percent of the actuarial liabilities in the eight cities and are at the highest risk.
Guadalupe’s five and Solvang’s three pension plans face moderate risk, while Buellton’s two pension plans face minimal risk, according to the grand jury’s analysis.
The Santa Barbara County Employee Retirement System also faces moderate risks that are well managed, the report says.
“There are substantial liquidity and solvency risks to the sustainability of many of the public defined benefit pension plans in the county,” the report concluded, noting the state’s Public Employee Pension Reform Act, which went into effect in 2013, has helped improve those risks.
“However, if there are additional fiscal shocks, such as an exogenous fall in tax revenue or a period of low returns on pension assets held by (the California Public Employment Retirement System), then other new policies may be required,” it continued.
“Such measures could be to reduce salaries and other nonpension benefits, to raise employee and employer contributions or to cut benefits, apply fiscal measures to fund higher employer contributions, as well as start new negotiations with labor unions to raise contributions from employees, or to otherwise modify benefits not covered by the new PEPRA Law of 2013.”
Grand jurors listed 12 findings and two recommendations in the report released June 20.
Santa Barbara County and its eight cities have 90 days — until Sept. 18 — to respond to whether they agree or disagree with the findings relevant to their pension plans and whether the recommendations have, will be or will not be implemented or whether they require further analysis.
Any further analysis of the recommendations would have to be completed within six months of the report’s release.
Complaints prompted study
The report says the grand jury chose to analyze risk to the nine principal public pension systems in the county after receiving complaints about their management and viability and considering the general public concern about them.
Santa Barbara County has a total of 76 pension plans, including several with employer contributions among the highest in the state, but the grand jury chose to look at only the single plan managed by the county and the 32 plans managed by the eight cities.
The remaining 43 plans are in special, sanitation and fire districts, insurance and risk management institutions, a law library and other public institutions.
All eight cities participate in the California Public Employee Retirement System, or CalPERS, risk pool, while the county does not. However, the grand jury said that was appropriate because the Santa Barbara County Employee Retirement System’s portfolio returns are comparable to those of CalPERS over the last 25 years.
The grand jury defined liquidity risks as threats to a plan’s cash flow. As an example, the report cited benefit payments to retirees exceeding the sum of contributions plus returns on the market value of assets.
Solvency risks — threats to a plan’s long-term ability to pay benefits — in the report are based on each plan’s funded ratio, or the market value of its assets divided by the value of its actuarial liabilities.
Plans with a funded ratio less than 1 are considered underfunded in the grand jury’s report. Those with ratios less than 0.7 are categorized as high risk, while those with ratios of 0.7 to less than 0.9 are moderate risk and those of 0.9 or greater are minimal risk.
The report found six municipal plans with high solvency risks — including Lompoc Safety and Santa Maria Miscellaneous — with an average ratio of 0.67.
Santa Maria has taken steps to end its policy of employer contributions in lieu of employee contributions in its pension plans, the report noted, adding that would move some of the burden of repaying unfunded liabilities from the city to active employees.
Among the jury’s 12 findings, pension solvency risk is moderate and liquidity risk is nil in Buellton, while solvency risks are minimal to moderate in Guadalupe and Solvang, although liquidity risks are higher because of cash flows under CalPERS actuarial returns projected in several years.
Solvency risks are high in Lompoc’s and Santa Maria’s pre-PEPRA plans, and liquidity risks in Lompoc are high due to projected years of negative cash flow that may require the city pension contributions at 50 percent of payroll.
Liquidity risks in Santa Maria are lower than in Lompoc as there are no projected years of negative cash flow unless CalPERS investment returns fall below its projected actuarial values. Managing the risks may require the city to maintain high employer contributions until at least 2034.
The report said the city also faces greater pension risks because of its comparatively low General Fund revenue per capita.
The grand jury also found the solvency risks to the Santa Barbara County Employee Retirement System are moderate and manageable, noting the decision to apply an accelerated amortization schedule to the unfunded liabilities generated from 2007 to 2009 will shorten the period in which high employer contributions are necessary.
The grand jury offered two recommendations to improve and maintain the health of the pension plans.
First, it said the cities of Buellton, Guadalupe, Lompoc, Santa Maria and Solvang and the county should analyze capital spending, employer/employee contribution rates, staffing levels and all existing taxes and revenue sources to identify potential revenue gains and cost savings.
Second, it said the cities and county should issue public reports, discussed in open sessions of their governing bodies, on the potential revenue gains and cost-saving measures that might be necessary to ensure continued adequate funding of their pension plans.
Snapshots of cities, county
Among the cities, the report showed Santa Maria, with the most pension plans at seven and the highest population among the cities at 103,642 in 2018, ranked second in the number of full-time employees at 498 in 2016-17 but third-highest in the percentage of its payroll that goes to pension contributions at 32 percent in 2017-18.
The city also ranked second-highest in accrued liabilities at $397 million, market value of assets at $275.9 million and unfunded liabilities at just over $121 million.
Lompoc, at second in the number of pension plans with six and third in both 2018 population at 43,712 and 2017-17 employees at 395, was second in percentage of payroll going to contributions at 40 in 2017-18.
It ranked third in accrued liabilities at $261.3 million, assets market value at $180,2 million and unfunded liabilities at just over $81.2 million.
For the other North County cities in the same years, Guadalupe had 7,252 residents, five pension plans, 31 employees, 12 percent of payroll in contributions, $12.6 million in accrued liabilities, $9.6 million in assets market value and $2.9 million in unfunded liabilities.
Solvang had 5,363 residents, three pension plans, 35 employees, 27 percent of payroll in contributions, $14.7 million in accrued liabilities, $10.9 million in assets market value and $3.8 million in unfunded liabilities.
Buellton had 5,021 residents, two pension plans, 19 employees, 16 percent of payroll in contributions, $8.1 million in accrued liabilities, $6 million in assets market value and $2.1 million in unfunded liabilities.
The report said Santa Barbara County population was 148,677 in 2018, it had 15 pension plans in its system, a staff of 4,218, paid 49 percent of payroll in contributions and had $2.7 billion in accrued liabilities, almost $2.2 billion in assets market value and nearly $585.8 million in unfunded liabilities.
July 2, 2018
Lompoc Record
By Mike Hodgson
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